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Seven new Free Trade Zones have opened in China

An official statement released on 31 March 2017 announced that the State Council had approved seven new Free Trade Zones (“FTZs”) in the provinces of Liaoning, Zhejiang, Henan, Hubei, Sichuan, Shaanxi and Chongqing Municipality. The FTZs were opened on 1 April 2017 bringing the total number of FTZs in China to eleven. The statement follows the announcement on 31 August 2016 by the Minister of Commerce for China that seven new FTZs would be established in China.

China’s existing four FTZs are located on the coast in Shanghai, Tianjin, Guangdong and Fujian. These areas were chosen for their geographical advantages for trade such as their proximity to major sea ports and international airports. Conversely, five of the new FTZs are located inland. The Chinese Minister of Commerce, Gao Hucheng, stated that this is reflective of that fact that Central and Western China will be the ‘new frontier’ for foreign investment in China, in line with its ‘One Belt One Road’ policy.

The following details have been released explaining why each FTZ has been chosen:

Zhejiang: improve the construction of Zhoushan Free Trade Port as well as encourage commodity trade liberalisation.

Henan: establish a modern three dimensional traffic system and modern logistics system meaning Henan will become a key location along China’s ‘One Belt One Road’ connection.

Hubei: hub for high-tech industrial bases focussing on the Yangtze River Economic Belt.

Sichuan: gateway to China’s western inland areas.

Shaanxi: facilitate the construction of the ‘One Belt One Road’ network.

Chongqing: strategic position in enabling access to the west of China facilitating the region’s overall future development.

The new FTZs will operate on the same ‘Negative List’ basis as the existing FTZs whereby there is a list of sectors in which foreign investment is subject to further restrictions or entirely prohibited but all industries not listed will receive equal treatment with domestic companies.

It is hoped that opening the Chinese market will encourage more foreign investment. The government policies for FTZs focus on free market policies and flexible governmental measures to encourage foreign firms to do business in China. Some of the benefits for foreign entities operating in a FTZ include being able to choose a virtual office rather than a physical one, quicker registration procedures, modified taxation rules and several benefits associated with customs such as that detailed customs clearance is not required until a later stage.

In addition, within the FTZs, foreign investors can establish a wholly foreign owned enterprise (“WFOE”) rather than being required to partner with a Chinese company in more industry sectors than in mainland China. For example, in the Shanghai FTZ manufacturing of certain types of motorcycles is permitted for WFOEs whereas in mainland China, foreign investors are required to establish a joint venture for such business. Also still unclear which industries are affected in the new FTZs, similar measures are expected there.

Although announced earlier in 2016, opening the FTZs now in 2017 emphasises China’s continued demand for foreign capital, as recent measures of the Chinese government have signalled discontent due to increasing capital outflows caused by fears of the decreasing value of the yuan and the decline in China’s GDP growth rate.